Energy Environmental Economics
Testimony of
Dr. Ren Orans
Theme 4
Imbalance Pricing
+ Founder and Managing Partner of Energy and Environmental
Economics, Inc. (E3)
+ Worked in Transmission Pricing, Cost of Service Ratemaking
and Wholesale Market Design for more than 25 years
•
20 peer reviewed published papers in these areas
+ Have testified many times as an expert on US and Canadian
transmission pricing issues
+ Have worked on developing balancing energy services in the
Canadian jurisdictions of Québec, Ontario and BC
+ Ph.D. and MS in Civil Engineering, BA in Economics
•
Dissertation: Area and Time-Specific Costing for Electric Utilities: A Case
Study of Transmission and Distribution Costs
Energy+Environmental Economics
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* Key Questions and Issues Introduce
by Mr. Marshall's Revised Testimony
,,,
+
Two key questions:
1. Is HQT's proposal compliant with the Régie's decision?
2. Is HQT's proposal compliant with FERC's guidelines?
+ To answer these questions, we need to consider three
technical issues:
1. What market-based formula provides an implementable,
opportunity-cost-based imbalance energy price?
2. Does the FERC default tiered pricing structure provide
sufficiently strong incentives to prevent "leaning" on the
system in Québec?
3. Is HQT's proposal consistent with other most comparable
jurisdictions?
Energy+Environmental Economics
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Defining Opportunity Costs in ••ÿ
Québec
+ HQ's "opportunity costs" are defined by the financial
consequences of providing imbalance energy service
+ Opportunity costs are a function of:
• Differences in market prices in neighboring jurisdictions
• Applicable transmission and ancillary service costs
• Time value of storage
+ Marshall's revised testimony introduces the following
four scenarios that we must consider*:
HQ Importing
OverInjection
Scenario #1
UnderInjection
Scenario #3
HQ Exporting
Scenario #4
Scenario #2
* Marshall's revised testimony, pp. 7-8
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Scenario #1: HQ is importing and
Generator A has a +10 MWh imbala^.
Generator A injects
10 MWh more than
scheduled
[Over-Injection]
$30/MWh
HQ is importing
from IESO at
$30/MWh
ISO-NE
$80/MWh
Instead of buying from Generator A,
HQ could have bought energy from
IESO at $30/MWh, which is HQ's
contemporaneous opportunity cost
to buy energy.
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Scenario #2: HQ is exporting and
Generator A has a -10 MWh imbalance
Generator A injects
10 MWh less than
scheduled
[Under-Injection]
$30/MWh
HQ is exporting
to ISO-NE at
$80/MWh
ISO-NE
$80/MWh
Instead of selling to Generator A,
HQ could have sold energy to ISONE at $80/MWh, which is HQ's
contemporaneous opportunity cost
to sell energy.
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Scenario #3: HQ is importing and
Generator A has a -10 MWh imbalance
Generator A injects
10 MWh less than
scheduled
[Under-Injection]
$30/MWh
HQ is importing
from IESO at
$30/MWh
ISO-NE
N.
$80/MWh
Instead of selling to Generator A,
HQ could have sold energy to ISONE at $80/MWh, which is HQ's
contemporaneous opportunity cost
to sell energy.
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Scenario #4: HQ is exporting and
Generator A has a +10 MWh imbala:
Generator A injects
10 MWh more than
scheduled
[Over-Injection]
$30/MWh
HQ is exporting
to ISO-NE at
$80/MWh
ISO-NE
$80/MWh
Instead of buying from Generator A,
HQ could have bought energy from
IESO at $30/MWh, which is HQ's
contemporaneous opportunity cost
to buy energy.
Energy+Environmental Economics
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Summary of Scenarios Introduced
by Marshall's Proposal
Scenario
Scenario #1: HQ
importing, over-injection
Scenario #2: HQ
exporting, underinjection
Scenario #3: HQ
importing, underinjection
Scenario #4: HQ
exporting, over-injection
Opportunity
Cost
Minimum
market price
Minimum
market price
Maximum
market price
Maximum
market price
Maximum
market price
Maximum
market price
Minimum
market price
Minimum
market price
HQT Proposal
• HQT's proposal relies on market prices and is based on HQ's
contemporaneous opportunity cost
• HQ's opportunity cost of buying and selling energy does not depend
on whether it is a net importer or net exporter
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Using Empirical Data to Test Strength
Penalties in Marshall's Proposal
+ Empirical results from Response to IR 7.1 from Régie
•
Assume HQ is a net exporter during high market price hours and a net importer
during low load hours.
•
Under Marshall's proposal, a generator can profit by under-delivering in lowpriced hours and over-delivering in high-priced hours
•
Empirical analysis considered 12 possible "trades" per day:
•
•
Marshall's proposal with no penalty allows 3,252 profitable trades during 2008
(75% of the 4,380 possible trades)
•
•
Generator under-injects during 12 hours with lowest prices in any neighboring market
(IESO, NYISO or ISO-NE) and over-injects during 12 hours with highest prices in any
neighboring market
Remaining hours unprofitable due to transmission & losses component of proposed
imbalance energy rate
25% penalty in Band 3 of Marshall's proposal still allows 2,200 profitable trades
during 2008 (50% of the 4,380 possible trades)
Marshall's proposal encourages
deviations during 50% of hours
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Does Marshall's Proposal Consider Ti
Value of Storage?
Number of Intra-day Trades by Value Avg. Value of Intra-day Trades by Month
2,000 -
1,500
MEE Avg Diff
2,249
-
Avg Buy
-
Avg Sel I
1,000
500
713
$0-$50
$50-$100
>$100
Fig. 1: Number of intra-day trades in three ranges of
net profits (Chart presented in response to IR 7.1
from the Régie).
Fig 2: This chart shows the same trades as Fig. 1,
expressed as the average value for all intra-day
trades in each month.
• Marshall's proposal does not consider the intra-day arbitrage
possibilities
• Further measures are needed to provide fair compensation to
the Service Provider and to discourage arbitrage
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Does HQT's Proposal Consider Time
Value of Storage?
Contemporaneous
Intraday with Storage
$140
-_
Avg Diff
$SC
-
Avg Buy
$60
-
Avg
$40
Sel
Avg Diff
-
Avg Buy
-
Avg
Sel I
$20
•
$0
_1 ^
1
Month
Fig. 1: Average value for all intra-day trades in each
month (same chart as Slide 11).
T
2
3
;-^
T-^
5
6
7
8
9
_ t-^
10 11 12
Month
Fig 2: Average value for same-hour trades in each
month (HQT proposal without fixed maximum buy and
minimum sell prices)
HQT proposal includes the following necessary characteristics of
opportunity cost:
a) Market prices to represent contemporaneous value of energy
b) Fixed minimum and maximum prices to represent time value
of storage
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Other Similar Jurisdictions with
Separate Buy and Sell Prices
+ BC Hydro - separate buy and sell price for Band 2
• Band 2: Imbalances beyond Band 1 threshold are settled at BC
Hydro's separate hourly buy or sell prices
+ BPA - separate buy and sell price and storage value for
Band 3
• Band 3: Imbalances beyond ±10 MW or 7.5% of the scheduled
amount are settled at separate buy and sell prices:
• For over-injections, 75% of BPA's lowest incremental cost that occurs that
da Y
• For under-injections, 125% of BPA's highest incremental cost that occurs
that day
• For persistent or intentional deviations:
• For over-injections, no credit
• For under-injections, maximum of 100 mills or 125% of highest daily
incremental cost
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+ Opportunity Costs
• "The Régie considers that using a market price meets the
objective of offering fair compensation to the service
provider without opening the way to arbitrage by
Transmission Provider customers." (Translation D-2009015, R-3669-2008, March 5, 2009, pg. 111)
• "The Régie is of the opinion that the reference price must
reflect hourly prices on neighbouring markets, adjusted for
transmission costs." (Ibid.)
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FERC Guidelines
+ Opportunity costs:
• "The determination and calculation of opportunity costs associated
with providing imbalance service will vary based on the circumstances
of the transmission provider... We will therefore continue to
consider proposals to include recovery of legitimate and
verifiable opportunity costs on a case-by-case basis consistent
with Commission precedent." (FERC Order 890-A, pp.156-157)
+ Tiered structure:
• "The Commission affirms the decision in Order No. 890 to adopt a
tiered bandwidth approach for both energy and generation
imbalances....Market structures in place within RTOs and ISOs are
fundamentally different from those in non-RTO/ISO regions. In
organized markets, system operators generally use a five minute
dispatch with multiple suppliers of imbalance energy responding to
system operator instructions...This is not the case outside of the
organized markets and, therefore, other incentives must be
provided to discourage deviations." (FERC Order 890-A, p. 136)
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+ Three technical issues
1.
Opportunity Costs: HQT proposal for balancing energy relies on a
plausible definition of opportunity costs, whereas Marshall's proposal
does not
2.
Tiered Structure: The standard tiered structure used by FERC might
need to be strengthened in Québec to prevent "leaning" on system if
Marshall's proposal is adopted
3.
Other Jurisdictions: Separate buy/sell prices and tiered penalties in
HQT's proposal are consistent with other similar bilateral trading
jurisdictions with large hydro systems
+ Two key questions
1.
Régie Compliance: HQT's proposal is compliant with the Régie's
requirements
2.
FERC Compliance: Given 1 and 2 above, HQT's balancing energy
proposal is consistent with FERC principles and falls into FERC "caseby-case" category
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